Through a special arrangement, presented here for discussion is a summary of a current article from Consensus Advisors, a boutique investment and advisory firm specializing in the retail industry.
While rumors of Barneys' imminent restructuring began swirling in early February, it was not the first time such chatter made the rounds in recent years. When we think about restructuring strategies and tactics in retail businesses, we start with the question: does the customer still care about this business model?
The answer to this question helps determine whether to reorganize a business for the long-term benefit of its stakeholders or liquidate its assets in the most efficient manner so as to maximize immediate recoveries to the business's creditors.
U.S. bankruptcy and insolvency policies have typically been biased in favor of resuscitating troubled companies, as opposed to marshaling assets for liquidation. Notwithstanding this policy, the majority of retailer bankruptcies in recent years have resulted in liquidations instead of reorganizations, including companies as Circuit City, Linens 'n Things, Bombay Company, KB Toys and Whitehall Jewelers. Some of these liquidated retailers (e.g., Circuit City, Linens 'n Things and KB Toys) were up against bigger, less leveraged and qualitatively better operators. Others, like Whitehall, were not sufficiently differentiated from their larger, better-known peers.
Barneys, on the other hand, is differentiated from its peers. While its luxury department store peers rely heavily on large, established luxury goods houses, Barneys is comfortable leaning on the next generation of fashion designers. This is in part due to volume. Estimated at approximately $700 million, Barneys' annual revenues are dwarfed by Nordstrom ($10.5 billion), Neiman Marcus ($4.5 billion) and Saks ($3 billion). Small designers may have difficulty providing the quantities that the larger chains want or need. It may also have to do with Barneys' boutique nature. Barneys operates nine larger Barneys New York stores — including flagships in New York City, Beverly Hills, Chicago and San Francisco — as well as 17 smaller CO-OP stores even more focused on young and emerging designers.
Barneys certainly has its competition, but they tend to be smaller footprint chains like Intermix and Scoop. Against this crowd, Barneys is the 800-pound gorilla.
Barneys has carved out a niche as the largest boutique of hip fashion for affluent urbanites. Stakeholders and professionals will have to forecast the retailer's sustainable level of cash flow in this niche to assess how much debt can be recovered. But we beleive the parties should be able to move quickly beyond the question of whether there is a unique, sustainable consumer base that still cares if Barneys exists.